The fundamental problem of antimicrobial resistance, developing for decades, represents a clear and present danger. With such undeniable need, we see potential for biotech and diagnostics companies to innovate, capitalize on an improving regulatory backdrop and navigate flaws in the regulatory, policy and incentives landscape. We see AKAO, GNMK, MCRB, MDCO and SPRO as well positioned.

Antimicrobial Resistance, Including Antibiotic Resistance, Is a Major Global Threat.

A projection of the potential future impact of antimicrobial resistance (which includes resistance to therapeutics for all infectious agents, including bacteria, viruses, and fungi) predicted that the 700,000 worldwide deaths currently attributable to antimicrobial-resistant infections could grow by 2050, if left unaddressed, to 10 million deaths per year – exceeding current estimates of annual deaths from cancer (8.2MM), diabetes (1.5MM), diarrheal disease (1.4MM) and road traffic accidents (1.2MM). Antibiotic resistance (resistance of bacteria to antibiotics) represents a very significant subset that has become the mission of an increasing number of emerging biopharmaceutical and diagnostic industry players. Following numerous discussions with expert consultants, we organized our thinking around the sentinel issues into five key realms – Novel Agents, Diagnostics, Regulatory and Policy Aspects, Economics and Incentives

Both High-Risk, Truly Novel Agents And Lower-Risk Modifications Of Existing Agents Show Clinical Promise. While big pharma has largely exited the antibiotics space, pure play companies have started to fill the gap with novel drug candidates. Our physician consultants have noted that both highly novel, high-risk solutions and modifications of existing drugs are needed. We agree that this mixed approach is necessary to solve the issue of antibiotic resistance in both the short and long term. Promising new antibiotics include plazomicin (AKAO; NDA submitted) and SPR994 or tebipenem (SPRO; in Phase 1, potential Phase 3 start in 2H18), and promising combinations include Vabomere (MDCO; approved August 2017 for CRE) and C-Scape (AKAO; in Phase 1, potential Phase 3 start in 1H18). Promising non-traditional approaches involve bacteriophage proteins, Fabl inhibition, targeting outer membrane proteins (SPRO), antibodies, and the microbiome (MCRB).

Rapid Diagnostics Are Badly Needed. To determine the right drug for the right patient at the right time, there is a logical and pressing need for faster diagnostics. Current efforts in this space include phenotypic susceptibility testing, sequencing (ILMN), and multiplexing (GNMK), but the ideal scenario (rapid, near-patient diagnostic assays) remains relatively far off. Given the challenge and importance of the diagnostics problem, we see companies with even modest advances in this area potentially gaining a significant foothold.

Regulatory and Policy Environment Has Improved Since GAIN Act, But More Action Is Required. The Generating Antibiotic Incentives Now (GAIN) Act, passed in 2012, has brought much-needed incentives from the regulatory side: an additional five years of market exclusivity beyond the standard five years for a new chemical entity; priority review status that reduces the standard 12 months of NDA review to eight months; and fast track status that provides early and frequent communication with the FDA. Ten antibacterial drugs with the Qualified Infectious Disease Product (QIDP) designation have been approved since 2012. Still, better regulatory clarity and broader policy interventions are needed to increase incentives for the development of new antibacterial drugs. The leading companies, in our view, are conducting outcome studies that pit their novel agents against the best standard of care, especially in real-world settings where new agents are most vitally needed (e.g., not simply gram-negative infections, but multidrug-resistant gram-negative infections).

Pricing And Reimbursement Environment Needs To Reflect Value Of Potentially Life-Saving Antibiotics. The Diagnosis-Related Group (DRG)-Based System used in the US and most of Europe is a major hurdle to overcome. A DRG “carve-out” system has been proposed and our expert consultants agree that such a system is needed to ensure access to new antibiotics when they are required. A broader problem with the economic model, though, is that price does not reflect the value of antibiotics to non-users.

Incentives “On All Fronts” Are Required To Propel The Revival That Has Begun. What is clear to us after interviewing physician, pharmacist, and industry consultants is that one or two changes are unlikely to change the incentive structure significantly. Both “push” incentives (to draw companies into development) and “pull” incentives (to award successful market entry) are needed. The Priority Antimicrobial Value and Entry (PAVE) Award appears to be one of the more comprehensive and forward-thinking proposals, because it delinks revenue and sales volume, but until such a system is implemented, pricing and reimbursement remain critical. In the current system, physicians often “save the best for last” and seem unwilling to use new treatment options because of cost constraints, although antibiotic stewardship actually involves prompt, appropriate use of new antibiotics.

With the current paradoxes, we do see longer-term investment opportunity as we see incentives continuing to grow and become shaped in a way which enables companies to pursue the essential work that is needed to address these truly urgent and undeniable unmet needs.

Investment Recommendations: Our view on the companies best positioned from an investment standpoint within this realm are those at the vanguard of INNOVATION, pursuing novel mechanisms of action and pharmaceutical innovations that will provide more durable solutions to antibiotic resistance (MCRB, $9.40, Outperform, Chris Shibutani; SPRO, $13.40, Outperform, Ritu Baral); those practicing STRATEGIC R&D, as embodied by companies that are pursuing clinical development strategies which include not merely non-inferiority studies to meet minimum regulatory thresholds but those that are developing their drugs with trials able to show superior outcomes (AKAO, $12.40, Outperform, Chris Shibutani; MDCO, $31.18, Outperform, Chris Shibutani); and finally those involved in DIAGNOSTICS, particularly those helping align the right therapeutics with the right patients. Within our coverage universe, GNMK ($4.71, Outperform, Doug Schenkel) appears best positioned; more broadly, we note that bioMerieux (BIM, not covered) looks well positioned to maintain market share leadership across many related diagnostic categories.